Setting yourself up for success with down payment planning is unique to every individual, and depends on your situation, personal circumstances, and preferences.
There are four main facets that should be considered by all homebuyers and investors when it comes to down payments:
- Down payment options
- Cost of lower down payments
- Benefits of lower down payments
- Personal considerations
Keep reading to find more information on financing programs for down payments. This information, provided by Austin Capital Mortgage, is not meant to steer you towards or away from any particular program. Rather, its purpose is to provoke thought and careful consideration about the various options available.
Down Payment Options
Though Austin Capital Mortgage requires only 3% down for many of our offerings, the typical down payment for a home is 20% of the cost of the home. That being said, few lenders still require 20% at closing. Assessing the pros and cons of putting down a 20% down payment can help you decide whether this is the correct option for you.
- A 20% down payment means no need for private mortgage insurance, or PMI.
- The higher your down payment, the less of a risk you are to lenders – that means lower interest rates for your mortgage loan!
- The higher your down payment is, the smaller your loan will be. This results in lower monthly payments and lower interest.
- Home sellers tend to prefer to work with buyers who have put down at least 20% as a down payment, as this is often an indication that the buyer’s financial situation is in order. This may help you get a competitive edge over other buyers, especially if the home you are buying is in a high-demand area.
- There is a financial risk for you, as the buyer. Once money goes towards your mortgage, it is often difficult to get it back.
- Putting down a higher down payment can mean that there is less money left over for other projects, such as home repairs, maintenance, and anything else that you may need in your new home.
- Saving such a large amount of money can take a very long time.
All of this being said, it is possible to buy a house with no down payment! There are several government-backed loan options available, including VA loans and USDA loans.
Additionally, various types of loans have different down payment requirements. For example, minimums for conventional loans range from 3-5%, depending on credit score, financial history, and other factors. FHA loans, however, can require anywhere from 3.5-10% (also depending on financial history and credit score).
The bottom line is, there are a wealth of options available to homebuyers when it comes to down payments.
Lower Down Payment Benefits and Drawbacks
Though lower down payments make it easier for homebuyers to produce the amount needed for a down payment, there are, as with every solution, negatives and positives.
- Increased liquidity.
- Higher returns. Your property appreciates at the same rate whether you put down 3%, 5%, or 20%.
- Lower down payments allow for more wiggle room with any extra money that is left after the home purchase. This can be put towards home improvements, other financial ventures, or savings.
- Low or no down payment programs have two primary fallbacks: higher interest rates, as well as higher mortgage insurance premiums. The solution to the mortgage insurance issue is that mortgage insurance can be removed once sufficient equity is produced.
- With lower down payments comes another burden: higher loan amounts, which means a higher monthly payment for you.
At the end of the day, the size of your down payment should be a carefully thought out decision. Though lenders will walk you through the process and qualify you for a specific loan amount, that qualification level may be vastly different from the amount at which you feel the most comfortable.
This is why it is always best to do your own calculations and research prior to consulting with a loan officer.
The Austin Capital Mortgage Difference
Not only have we been ranked in the top 25 lenders in Central Texas, we are also known for our ability to work with complex deals. Those with more intricate loan situations, including realtors, builders, and CPAs, continue to put their trust in us year after year. We are also often entrusted by other lenders with demanding deals that need to be closed fast. At Austin Capital Mortgage, we always:
- Put you and your needs first.
- Proudly offer some of the most competitive rates in the nation.
- Work quickly and efficiently to get you everything you need; we close most of our loans in 30 days or less.
- Have the ability to offer numerous types of loans, allowing us to find the ideal loan for you.